Econintersect: J. Kyle Bass, head of Dallas-based hedge fund Hayman Advisors LP, says Japan is reaching the end of the road of insolvency. To be more specific he says the current actions in Japan and in the Japanese bond market is the “beginning of the end“.
[Watch Bloomberg video after the Read more >> jump.]
Click to view video at Bloomberg.com.
Bass cites the jump in volatility in trading of Japanese bonds as indicative of higher stress in the country’s bond markets. From Bloomberg:
Historical price volatility of Japanese government bonds maturing in more than 10 years has jumped 11.9 percentage points this year to 14.6 percent on a 10-day reading, the second highest among the 25 sovereign markets tracked by the European Federation of Financial Analysts Societies and Bloomberg. That’s a reversal from the end of 2011, when Japanese government bonds were the least volatile globally.
But these volatility numbers are somewhat misleading. Volatility for a ten-year bond yielding 0.58% yield (Japan) should not be directly compared to that for bonds yielding 11% (Greece). And the rise from 0.45% to 0.58%, an increase of nearly 30% in less than a week, is a very minor move in the context of yield history over the past year (Bloomberg):
A 30% increase in yield in just a few days has a significant impact on bond volatility calculations but is relatively minor when it represents only 1/3 of the rate decline over the past six weeks.
A contrasting view is offered by Edward Harrison of Credit Writedowns:
The Japanese situation is all about policy rates, expected future policy rates, expected inflation and currency depreciation. It’s not about bond vigilantes forcing a sovereign currency issuer to pay extortionate rates on its own currency obligations. Currency revulsion? As I have said time and again, the currency is the release valve. And we are seeing that with Japan as I predicted. The Yen is getting crushed and rates are falling. In Japan, the 5-year is down 10 basis points, the 10-year is down 44 basis points and the 30-year is down 56 bps points in the last year alone! Where’s the stress that Bass points to? He is totally out of paradigm. It’s about policy rates, expected policy rates and inflation. That’s it. The bond vigilante stuff is a myth – just like it is in the UK, by the way.
In his interview Bass compares Japan to countries such as Argentina, Greece, Spain and Italy. All of these countries do not operate with a free floating sovereign currency. Japan does.
Sources:
- Bass Says Japan Bondholders’ Reaction to Stimulus Telling (Kelly Bit, Bloomberg, 09 April 2013)
- Kyle Bass gets it wrong on Japanese bonds (edward Harrison, Credit Writedowns, 09 April 2013)
